Blockchain & Money

Class 5 1September 20, 2018

Class 5 (9/20): Study Questions • How does Bitcoin record transactions? What is unspent transaction

output (UTXO)? What is script code embedded in each Bitcoin transaction and how flexible a programming language is it?

• As many design features pre-date Bitcoin, what was the novel innovation of Santoshi Nakamoto?

• Who is Satoshi Nakamoto? (Only kidding a bit.)

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Class 5 (9/20): Readings

• ‘Bitcoin’s Academic Pedigree’ Narayanan and Clark

• ‘Making Sense of Cryptoeconomics’ CoinDesk

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Class 5 Overview

• Transaction Inputs & Outputs • Unspent Transaction Output (UTXO) • Scripting language

• Blockchain Design – Putting it All Together • Bitcoin’s Academic Pedigree

• Who is Satoshi Nakamoto?

• Conclusions 4

Transaction format

Uniquely identifies an

output

Input Output Previous transaction ID Value

Index

In satoshis 108 = 1 bitcoin

Public Key(Bitcoin Address)

Signature

A “coin”

lock_time 5

Transaction format Inputs > Outputs Multiple Inputs & Outputs Inputs – Outputs = Fees

Inputs Outputs TXID 6, IDX 3, Dsig1

3 BTC

TXID 20, IDX 2, Dsig2 2 BTC

TXID 42, IDX 5, Dsig3 5 BTC

Bitcoin Address 1 6 BTC

Bitcoin Address 2 3 BTC

Bitcoin Address 3 0.9 BTC

Sender’s Change

lock_time 6

Coinbase Transaction

Reward for Solving Proof of Work

• Only Input is the Coinbase Block Reward

• Reward halves (1/2s) every 210,000 blocks

• Currently 12.5 Bitcoins per block

• Originally 50 Bitcoin per block

• Output may not be used as a Transaction Input until another 100 Blocks

• Recorded as First Transaction in Merkle Tree

• May Include 100 bytes of arbitrary data

• Used for Additional Nonce

• Genesis Block included Headline from Financial Times:

‘The Times 03/Jan/2009 Chancellor on brink of second bailout for banks’ 7

Unspent Transaction Output (UTXO) Set Bitcoin transaction outputs that have not been spent at a given time

• Contains All Currently Unspent Transaction Outputs

• Speeds up Transaction Validation Process

• Stored using a LevelDB database in Bitcoin Core called ‘chainstate’

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Unspent Transaction Output (UTXO) Set

vs. 30 M Txs

vs. 100 M Txs

vs. 342 M Txs

9Source: Blockchain.com – 9/17/18 Courtesy of Blockchain Luxembourg S.A. Used with permission.

Bitcoin Script

Programing Code used for Transactions

• Stack-based Code, with no Loops (not Turing-complete)

• Provides a Flexible Set of Instructions for Transaction Validation and Signature Authentication

• Most Common Script Types in UTXO: • Transaction sent to Hash of Bitcoin Address – ‘Pay-to-PubkeyHash’ (81%)

• Transaction sent to Hash of Conditional Script – ‘Pay-to-ScriptHash’ (18%)

• Transaction subject to Multiple Signatures – ‘M of N Multisig’ (0.7%)

• Transaction sent to Bitcoin Address – ‘Pay-to-Pubkey’ (0.1%)

(Source: Perez-Sola, Delgado-Segura, et al.) 10

Blockchain Technology timestamped auditable database network consensus protocol append-only log

Secured via cryptography Addresses ‘cost of trust’ • Hash functions for tamper (Byzantine Generals problem)

resistance and integrity • Permissioned• Digital signatures for consent • PermissionlessConsensus for agreement

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Bitcoin – Technical Features • Cryptography & Timestamped Logs

• Cryptographic Hash Functions • Timestamped Append-only Logs (Blocks) • Block Headers & Merkle Trees • Asymmetric Cryptography & Digital Signatures • Addresses

• Decentralized Network Consensus • Proof of Work • Native Currency • Network

• Transaction Script & UTXO • Transaction Inputs & Outputs • Unspent Transaction Output (UTXO) set • Scripting language 12

Cryptographic Hash Functions One-Way Data Compression

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Timestamped Append-only Log - Blockchain

Image is in the public domain. 14

Merkle Tree – Binary Data Tree with Hashes

Image is in the public domain. 15

Asymmetric Cryptography & Digital Signatures Guarding against Tampering & Impersonation

Digital Signature with Hash

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Bitcoin Address Determined by – but not identical to - Public Key

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Blockchain – Proof of Work Chained Proof of Work for Distributed Network Consensus & Timestamping

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Native Currency Economic Incentive System

• Bitcoin – BTC

• Reward Created through Coinbase Transaction in each block

• Overall ‘Monetary Policy’ preset in Bitcoin Core

• Reward halves (1/2s) every 210,000 blocks

• Currently 17.3 million BTC; capping at 21 million BTC in 2140

• Market based transaction fee mechanism also provided for in software

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Network

• Full Nodes – Store full Blockchain & able to Validate all Transactions

• Pruning Nodes – Prune transactions after validation and aging

• Lightweight Nodes - Simplified Payment Verification (SPV) nodes – Store Blockchain Headers only

• Miners – Performs Proof of Work & Create new Blocks - Do not need to be a Full Node

• Mining Pool Operators

• Wallets – Store, View, Send and Receive Transactions & Create Key Pairs

• Mempool – Pool of unconfirmed (yet validated) Transactions 20

Narayanan and Clark’s Chronology of Ideas in Bitcoin

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Who is Satoshi Nakamoto? Results of Ad Hoc Survey of Students

Group Led by Hal Finney Nick Szabo Craig Wright Dorian Nakamoto State Actor - US Government (NSA) or Otherwise

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Image is in the public domain.

Class 6 (9/25): Study Questions • What are smart contracts? How do they compare to traditional

contracts? What are tokens?

• What are smart contract platforms such as Ethereum? What generally distinguishes them from Bitcoin?

• What are decentralized applications (DApps)? What has been the usage and why haven’t any DApps yet received wide consumeradoption?

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Class 6 (9/25): Readings Required • ‘Smart Contracts: 12 Use Cases for Business & Beyond’ Chamber of Digital

Commerce • ‘State of the Dapps: 5 Observations from Usage Data’ McCann • ‘Ethereum Competitors: Guide to the Alternative Smart Contract Platforms’

Blockonomi

Optional • ‘Smart Contracts: Building Blocks for Digital Markets’ Szabo • ‘A Next-Generation Smart Contract and Decentralized Application Platform’

Ethereum • ‘Blockchain Technology as a Regulatory Technology’ De Filippi & Hassan

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Guest Lecturer – Larry Lessig • Harvard Professor of Law and Leadership. • Founder of Stanford Law’s Center for Internet and Society. • Clerked for Justice Antonin Scalia and for Appeals Court Judge Richard Posner. • Awards include the Free Software Foundation’s Freedom Award, Fastcase 50

Award and being named one of Scientific American’s Top 50 Visionaries.

‘Code and Other Laws of Cyberspace’ • Code/architecture – physical or technical constraints • Market – economic forces • Law – explicit mandates by government • Norms – social conventions

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Conclusions • Nakamoto’s Bitcoin brought us Blockchain Technology

• Blockchain technology is within long history of Money & Ledgers

• Its Design Features also can be placed within history of technology • Timestamped Append-only Logs (Blocks) • Cryptographic Hash Functions & Digital Signatures • Network Consensus

• Key Innovation – Decentralized Chained Consensus Protocol • Addresses ‘Costs of Trust’ • Provides Peer-to-Peer alternative for Money, Ledgers & Computation

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15.S12 Blockchain and Money Fall 2018

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